How to reduce Days Sales Outstanding (DSO)

As companies are trying to navigate changing and more flexible work environments, they’re also looking for ways to become more efficient. Does this sound like you? There are many metrics that can be put in place to measure success, but one way to help your organization run more smoothly and keep afloat during tough times is to reduce days sales outstanding.

Days sales outstanding (DSO) is the measure of the average number of days that it takes a company to collect payment for a sale. The fewer days your sales are outstanding, the faster you, as the supplier, get paid. Lower DSO improves your cash flow and keeps your business running at its best. However, a higher DSO can hinder your business from growth since your profits aren’t being realized on time. In turn, this slows down the rest of your operations that run your business.

In a perfect world, your customers would always pay you on time, if not in advance. But that is not how it plays out most of the time. In today’s world, with more uncertainty and organizations adopting leaner models, it is getting even more challenging for your customers to pay you on time or in advance.

So how can your organization thrive and reduce its DSO? I’ll explain why some traditional strategies you think might work can actually hurt you in the long run. Then I’ll lay out some innovative strategies you can adopt that will help improve your long-term cash flow.

There are some strategies that your organization may have heard of or tried out to reduce DSO. Although they can work short-term, I do not recommend these strategies for long-term use. Here are some traditional strategies meant to reduce DSO and why they’re not as effective as you may think.

So, if these aren’t the best solutions, what is? Don’t fret. There are strategies you can adopt to organically reduce your DSO without needing to constantly reach out to your customers and offer discounts. In fact, the strategies I’m about to reveal can actually help you save more money, foster positive relationships with your trading partners and give you more visibility and control as to where your invoices are in the cycle.

The best way to truly reduce your DSO over time is to approach your accounts receivable process holistically. Rather than focusing simply on the part where your customers pay you, look at what changes you can make to shorten the time spent getting the invoice prepared, sent and finally received by your customer into their accounts payable system. Here are our suggestions for the best practices to improve DSO:

Improved return on investment (ROI) is a result of reducing your DSO. You can easily calculate the impact that reduced DSO can have on your organization by knowing your company’s sales revenue, invoice to cash cycle and weighted average cost of capital (WACC).

Let’s use the following numbers as an example for calculating DSO:

By adding these numbers together, your working capital to fund cash cycle would be $61M with a working capital interest cost of $7.3M.

According to our customer data, moving to an e-invoicing process can improve the cash cycle by an average of approximately nine days. The reason for this is because your customer will receive the invoice straight into their AP systems within seconds instead of days.

In addition to reducing the days, what would this significantly improved cash cycle mean for working capital interest savings? Let’s say you send e-invoices that make up 50% of your total sales revenue. By getting paid nine days faster, your company would then realize $739,000 in interest savings alone.

Imagine what your organization could do with the savings it gets from just reducing its DSO!

At this point, you have the innovative strategies and best practices to make your entire AR process faster, which will help reduce your DSO. Great! Now, how do you implement these strategies? A good place to start is to invest in a solution that will help you go digital by using cloud-based technology. This will enable you to standardize the output of invoices and connect you with your trading partners for electronic communication. Not only will your AR process be streamlined, but you will also get paid faster.

How so? A few ways:

Reducing DSO is a powerful way to improve your cash flow. Learn how Hewlett Packard Enterprise has reduced their DSO from 7+ days down to 2 hours using Pagero.

Pagero can help you achieve your goals. Our best-in-class solutions help you streamline your order management process and beyond. And with our uniquely global reach, we take care of full invoicing and tax compliance so you don’t have to. Start streamlining your AR process today.

This text was originally published 10 June 2020 and last updated 16 March 2022.